ESG still just a 'guideline' in most of APAC

Regulatory adoption, net-zero, ILPs, and more on the horizon

ESG still just a 'guideline' in most of APAC

Insurance News

By Kenneth Araullo

Sustainability is a concept that will continue to be a spotlight for any company looking to grow in the future, especially in the face of changing climates and growing social awareness. In Asia, however, environmental, social, and governance (ESG) remains a point of reluctance for a significant portion of the insurance sector.

“In most of jurisdictions in APAC, ESG requirements are still in a form of ‘guideline,’ rather very enforceable,” abrdn insurance solutions director Jian Xiong said in conversation with Insurance Business Asia. “It is possible that some are still taking passive, responsive approach for ESG integration.”

Xiong is responsible for developing and executing asset manager abrdn’s insurance solutions across the APAC region. He described at length the recent APAC Insurance Investment Landscape survey from the firm that detailed various findings, ranging from the slow adoption and reluctance on ESG, the importance of regulatory adoption, and the rise of investment-linked policies (ILPs).

Regarding the status of ESG in the region, Xiong also said that there are still two significant barriers to overcome for insurers to integrate the framework: data quality and investment management. Both barriers can be surmounted, although they are not without their own set of risks.

“For the first barrier, insurers may partner with data providers to [get] access to qualitative and quantitative ESG data for their internal usage, such as ESG investment, risk management and reporting. This is the most cost-efficient option for insurers to start with their ESG journey. However, insurers need to take efforts to ensure data is standardized and comparable. Also, insurers need to work with data providers to ensure the data is constantly updated and has sufficient coverage for their activities,” he said.

As for the second barrier, Xiong said that outsourcing ESG investment management could be the best solution. He said that in these efforts, professional investment managers can do wonders for a company looking to shift to ESG.

“The managers can help insurers analyse impact of ESG factors on asset value, optimise investment portfolio, improve ESG profile while maintaining current risk/return objective and manage portfolio according ESG targets set by insurers. This is the fastest and most cost-efficient way for insurers to implement ESG investment strategies. But insurers need to select managers with good track record and strong capability for ESG investment,” Xiong said.

IFRS 17’s impact, and the effects of regulatory adoption

The survey from abrdn also found that nine out of 10 insurers consider the adoption of IFRS 17 as their highest priority. However, there’s still that remaining one who goes against the tide, and Xiong said that this anomaly is not without an explanation.

“IFRS 17 has two major impacts on insurance business. One is to address how [an] insurance company classifies and measures liabilities, another is to address how [an] insurance company recognizes its business profit and loss. It is widely believed that the latter has more fundamental impact on insurance business, because it affects an insurer’s business strategy, product lines, IT systems, etc. The former does have effect on insurance investment, but in an indirect way,” he said.

Taking both into mind, he said that it is not uncommon, based on the asset manager’s experience in the matter, for some investment professionals see the second impact as so overwhelming that the first is underestimated or even neglected.

“As matter of fact, insurers could leverage on requirements set by IFRS 9 to elect accounting measures for their assets, with purpose to match the classification of liability according to IFRS 17. This is a good practice of asset-liability management. And investment professionals should be aware that selecting assets which comply with IFRS 9 requirements is their responsibility,” Xiong said.

The aftermath of proper regulatory adoption could hold some great advantages for firms that successfully implemented it. Conversely, it can lead to ruin for those that fail to adapt, and Xiong highlighted Solvency II in the UK and Europe several years ago.

“Looking back to what happened in UK and Europe when they adopted Solvency II some years ago, some insurance companies were not able to adopt very well. So, they were forced to change their business strategy, exited traditional, capital-heavy products, and focused on capital-light products, such as Investment-linked policies,” he said.

“Some insurers’ risk management became inefficient but were unable to change their product mix. As a result, they gradually became uncompetitive and even insolvent. Some companies, however, realized that was an opportunity for them to upgrade their asset-liability management framework and turned regulatory adoption into a differentiation factor to gain competitive advantages,” Xiong said.

ILPs, and responding to the new RBC regime

The arrival of a new risk-based capital (RBC) regime also signals the sudden rise of ILPs. Xiong said that the expansion for these new policies is a clear indication of insurers responding to new regulations, but cautioned that while it presents opportunities, it also comes with challenges for both newcomers and old players in the space.

“It is true that old players have distinguishing advantages. For one, they have established distribution networks. Personal connection and community-based sales can still work well nowadays. They also have sizable AUM of ILP funds and need very little capital injection in that regard. Finally, they are familiar with compliance requirements and have well-established operational process,” he said.

These same advantages could end up turning against them, Xiong said. For instance, the agent-based sales model may seem outdated and may end up risking the younger generation of customers. It also needed a large investment to upgrade the existing operating system to cater for new needs, such as portfolio auto-rebalance. Finally, there’s the issue of the cannibalization effect, in which case the digital channel may end up eroding the existing agency channel.

“The newcomers could take advantage of digital platforms to embrace the new trends of ILP sales, such as robot advice, model portfolio and discretionary management. But it may take them some time to build up a considerably large AUM to achieve break-even,” he said.

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